It is generally advisable to carry out the conversion over several years and, if possible, convert more into years when your income is lower. The amount you convert to a Roth IRA is taxable, but you won’t have to withhold any taxes during the transition. You can choose to pay taxes on a Roth conversion when you file your tax return. However, if the tax bill is large enough, you may face penalties for late payments. Review your overall tax situation with a tax professional and make estimated tax payments as needed, ideally from assets that do not belong to the IRA.
Plus, regardless of your age, you can still contribute to your Roth IRA as long as you’re still earning eligible income. If you deposit the money into another IRA and then try another rollover within 12 months, the payout is immediately taxable. Also note that any transaction that results in a taxable IRA distribution can be subject to a 10% penalty if you are under 59½ years of age. In most cases, naming your spouse as the primary beneficiary of your IRA offers the most flexibility.
According to the IRS, you can only rollover from one traditional IRA to another traditional IRA in a 12-month period. To discuss the potential benefits of Roth IRAs and Roth IRA conversions with a Wells Fargo retirement professional, call 1-877-493-4727. Make sure you keep the beneficiaries up to date on your IRA accounts as these allocations replace a will. For someone whose tax rate falls from 22 to 12%, the changeover will be unfavorable if more than 40% of taxable account income is tax-free. If the money you withdraw from a Roth IRA isn’t a qualified distribution, some of it may be taxable.
Converting too much can also result in a larger percentage of your Social Security benefits being taxed. Traditional IRAs offer a tax deduction up front and defer taxes until you make withdrawals in the future. For example, if your will states that you want your IRA to go to your daughter but your sister is listed as a beneficiary in your IRA account, your daughter may not receive the money. Your IRA may need to file IRS Forms 990-T or 990-W and pay estimated income taxes over the course of the year.
However, people in this situation can still convert traditional IRAs into Roth IRAs, the strategy known as the backdoor Roth IRA. Either way, turning your investments into a Roth allows you to grow your income and eventually be distributed tax-free, potentially saving you thousands of dollars in the long run. Contributions to Roth IRAs are not tax deductible, but qualified withdrawals in retirement are tax-free.